The financial and capital markets are not finding peace even for the month of September and recorded one of the worst months in recent history. The sharp rise in rates led to a valuation adjustment in almost all asset classes. As a result of the inflationary threat, major central banks around the world, after a long period of negative rates and quantitative easing, have starded and continue to apply restrictive monetary policies to counter this phenomenon. The FED raised its benchmark rate to 3.25%, with a latest increase of 0.75% at its last meeting in September, declaring that it sees rates at 4.6% by the end of 2023. The ECB, at its meeting on 8 September, also decided to raise official rates by 0.75%. This is the highest level of rate increase since 2011 and follows the 0.50% increase in July 2022. To deal with this complex situation and try to reduce inflation, it is reasonable to expect that the ECB will not stop here, so further rate hikes are expected in the coming months starting with the October meeting. Meanwhile, September’s preliminary inflation in the Eurozone rose to 10% from 9.1% from the previous month. Inflationary dynamics are clearly the focus of markets. In general, inflation has been driven by three components. The first relates to so-called “bottlenecks,” i.e., the malfunctioning of the distribution and production chains generated by the strong post-Covid recovery; the second related to the rise in commodities, where the rise in energy costs as a result of the war in Ukraine heavily; and the third is inherent in those “multiplication” effects of inflation as sectors that have experienced price increases pass them on to downstream sectors.
Meanwhile, geo-political tensions continue to escalate; Moscow has announced the annexation of regions of Ukraine occupied by the Russian military, and the pipeline carrying gas from Russia to Europe has been severely damaged, fueling mutual accusations between the Kremlin and NATO countries.
Since stock prices reflect the future and discounted earnings of companies, rising rates have led to a major valuation adjustment. This has been compounded by a difficult market environment characterized by inflation and a stagnant economy. As a result, the MSCI World stock index in September fell by 9%, in the same wake the major world indexes starting with the United States with S&P 500 -9.60% and Nasdaq -10.20%. Doing slightly better were the European Euro Stoxx 50 index -4% and Swiss SMI index -3.71%. Asian markets also do badly with Nikkei index down 6.20% and Hang Seng 12.10%.
Against a background of persistent inflation, rate hikes, declining growth estimates and severe financial tensions, the risk/return ratio of markets looks unfavorable in the short term. In our view, short-term rebounds cannot be ruled out. We therefore seek to mitigate short-term downside risks while maintaining exposure to medium- and long-term upside.